A Buyer's Job Market

In the new war for talent, acquirers want only the right people -- at the right price.Lori Calabro, CFO MagazineNovember 1, 2004

Back in the merger mania of the 1990s, companies bought and sold workforces as much as they scooped up or divested tangible assets. In their haste to expand, acquirers coveted personnel — especially executive talent and technical personnel — as much if not more than property, plants, or equipment. To keep that talent in place, the deals often included lucrative retention packages.

Times sure have changed. Mergers are just starting to recover from the deal-making drought that befell the market after the equity bubble burst. And with stubbornly high unemployment cooling competition for talent, acquirers are being much more parsimonious about whom they target and how they retain them.

In fact, according to the Society for Human Resource Management, only 14 percent of employers offered retention bonuses for executives in 2004. Just 10 percent offered them to nonexecutives. Moreover, the packages being offered are nowhere near the amounts seen five years ago.

Of course, "there are key employees at every organization," says Lawrence Gennari, a partner at Boston-based law firm Gadsby Hannah LLP. Also, what is paid to retain them varies by position. Overall, however, there has been a 20 to 25 percent decline in the size and duration of retention bonuses in the past two years, he says. "Where we used to see retention bonuses covering 12 to 18 months, now it is 9 to 12 months. And where it used to be 12 months of salary, now we are talking [half that] for a key employee," says Gennari.

The economics of the equation are obvious. "Supply is greater than what we had in the boom market of the 1990s," says Marc Baranski, senior vice president at Sibson Consulting. "So what's happening is that companies are focusing on the right people as opposed to everybody."

The "right people" doesn't necessarily mean those at the top. Consider the recent acquisition of Hall Kinion by Kforce Inc., a specialty staffing company in Tampa. Kforce chose not to retain any of the executive team, but held on to most of the target's 250-person workforce. Ashley Read, CFO of venture-capital firm Blueprint Ventures, notes that she has witnessed founding teams broken apart in several recent deals. "At the end of the day in this market, the buyer calls the shots. And buyers have become much more savvy in their negotiations [about people] up front," says Read.

What Caution Requires
In fact, deciding who to keep is as important as how much to pay. And that requires greater care in evaluating talent. "We are much more careful about keeping only those people who fit within the culture of our organization," says Kforce COO Bill Sanders, who has completed 25 acquisitions in the past eight years. Adds Harlan Plumley, CFO of BIO-key International Inc., a provider of biometric technology and fingerprint readers: "In every case, there's a vetting process — and it is much more clinical these days."

That means more due diligence. Although he won't admit to using them, Plumley notes that "background checks are an important element in the process." But the process is about more than looking carefully at the credentials, performance, and experience of individuals. Baranski explains that firms are being more explicit in segmenting the employee population in light of a deal's justification. "If a company is expanding into a new geography or buying new products, it is critical to hold on to [a large part] of the people base," he says. If a company is simply buying for size, however, "they usually segment the population into people that they want to keep permanently, people that they need to stay on through a transition, and people that are not critical."

Says Plumley: "It's really about what is my motivation as a buyer." In the case of BIO-key's recent acquisition of Aether's Mobil Government division, for example, the deal catapulted the firm into becoming the largest provider of wireless public-safety solutions. And through its due diligence, says Plumley, BIO-key recognized that "the infrastructure [at AMG] was better than what we had." So not only did the company retain more than 100 employees, including six executives, in the $10 million deal, it is also moving its headquarters from Minneapolis to Marlboro, Massachusetts, where AMG is located.

Previously, says Sanders, Kforce had only limited discussions about strengths and weaknesses below the executive level. Now, he says, the company meets with the field offices to assess a target's personnel. And he says those assessments may even be made "undercover" — meaning before the deal closes, by those who will supervise the new employees.

In the Hall Kinion deal, once those decisions were made, the company "went to extraordinary lengths" and spent "hundreds of thousands of dollars" to assemble the new employees in Tampa and bring them up to speed on their duties, their place within the organization, and their compensation, says Sanders. And the COO expects most of the Hall Kinion people to stay with the new organization because Kforce offers better overall compensation than its targets, and orients the new employees as soon as the deal closes. To date, in fact, there has been only a 10 percent turnover since the deal closed in June, compared with an average turnover of 50 percent in the industry.

Shorter and Cheaper
What the Hall Kinion people didn't get were retention bonuses. In previous deals, Kforce made a practice of offering such bonuses. Instead, Sanders says, Hall Kinion employees got the opportunity to link their pay to performance, since Kforce's pay is commission-based.

Even retention bonuses are more often linked to performance these days, says Baranski. "Whereas before it was time-based, now it's if you stay around and you do these things, you get [paid]," he says. "So you may get one times salary to stay for x amount of time and another 50 percent on a performance basis."

Those bonuses that do get paid are not only much leaner, they are also more cash-based. As Plumley puts it, employee stock options are "no longer the coin of realm." And their structure often depends on what other compensation is already on the table. If the deal triggers a golden parachute, says Ross Zimmerman, compensation consultant with Hewitt Associates LLC, "that makes it a much narrower crowd of people that you have to extend value to with retention packages."

Finally, packages are extended these days on a take-it-or-leave-it basis. "We aren't seeing any negotiation at all," says Gennari, who has overseen several deals with retention bonuses so far this year. The attitude, adds Zimmerman, is no longer "what do we need to do to make them blind to the next opportunity?" Instead, it's "this is what we can put on the table without inflating the price of the deal," he says.

Leaving Anyway
Of course, companies increasingly recognize that there's no way to guarantee the effectiveness of retention packages, and that they lack recourse if an employee simply waits out the necessary time limit and collects the money.

Still, supporters contend that the packages can work. "If retention bonuses are set at the right level," says Zimmerman, "90 percent of the time they are effective." However, he adds, employees' expectations must be taken into account, and there must be a minimum level offered. "Anything under 20 percent is ineffective; you are wasting your money," he says.

But others question the value of any retention bonuses in this environment. "It's a hollow benefit in a way," says Plumley. "In a bad economy, people may stay simply for the payout. And if the employee is not motivated, what's the point?"

Lori Calabro is a deputy editor of CFO.

Dealing Yourself Out

Retention of CFOs hasn't changed much in this latest merger round. They are still the odd men out.

That's not to say CFOs aren't critical when a company is being acquired. After all, they are the ones shepherding the acquisition of a target, and identifying the key people who should stay. But CFOs typically do not stay long after a deal is done.

"The CFO has to be involved," says Lawrence Gennari, a partner at Boston law firm Gadsby Hannah LLP. "He or she needs to know who you are committing to" in terms of personnel, he says, because that cost will be reflected in the purchase price.

Their own retention bonuses, however, are usually tied to finalizing the deal. "They may get a three-month bonus post-deal, but most of their packages are triggered by the closing," says Gennari. There are exceptions: in Mylan Laboratories Inc.'s acquisition of King Pharmaceuticals Inc., the only executive Mylan has offered a job to so far is King's CFO, James Lattanzi. The new executive vice president at Mylan's branded-drugs division will get a $500,000 retention bonus if he stays with the soon to be merged firm. —L.C.